Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Western Refining, Inc (NYSE:WNR)

Q4 2012 Earnings Call

February 28, 2013 10:00 pm ET

Executives

Jeff Beyersdorfer – Director-Investor Relations

Jeff Stevens – President, Chief Executive Officer

Gary Dalke – Chief Financial Officer

Mark Smith – President-Refining & Marketing

Analysts

Manav Gupta – Morgan Stanley

Chi Chow – Macquarie Capital

Clay Rynd – Tudor Pickering Holt

Ann Kohler – Imperial Capital

Cory Garcia – Raymond James

Operator

Good morning, and welcome to the Fourth Quarter and Full Year 2012 Western Refining Earnings Conference Call. After the speakers’ opening remarks, there will be a question-and-answer period. (Operator Instructions)

As a reminder, ladies and gentlemen, this conference call is being recorded, and your participation implies consent to our recording of this call. If you do not agree with these terms, please disconnect at this time. Thank you.

I would now like to turn the conference over to Mr. Jeff Beyersdorfer, Treasurer and Director of Investor Relations of Western Refining. Mr. Beyersdorfer, please go ahead, sir.

Jeff Beyersdorfer

Thanks, Paula, and good morning. I’d like to thank you for taking the time to listen in today and for your continued interest in Western Refining. Again, my name’s Jeff Beyersdorfer. I’m the company’s Treasurer and Director of IR.

Joining me for today’s call are Jeff Stevens, our President and CEO; Gary Dalke, our CFO; Mark Smith, our President, Refining and Marketing; and other members of our senior management team.

We will be referencing our earnings call slides throughout the call this morning. The slide presentation, in addition to our earnings release, can be found on the Investor Relations section of our website at wnr.com.

Before we proceed, I’d like to make the following Safe Harbor statement. Today’s presentation will contain forward-looking statements, and I refer you to the Forward-Looking Statements section of our earnings release and recent filings with the SEC. We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances.

In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, we report certain non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the comparable GAAP results, which can be found in the press release, which is posted on the IR section of our website.

I’ll now turn the call over to Jeff.

Jeff Stevens

Thanks, Jeff. Welcome to everyone on the call. Today, we will discuss our fourth quarter and full year performance. After my opening remarks, Gary will review our earnings in more detail and provide operating guidance for Q1 2013. And then we will open up the call for your questions.

The fourth quarter wraps up an unprecedented year for Western. But before we get into specifics about the quarter, I’d like to take a step back and reflect on what we’ve been able to accomplish at Western over the last couple of years. In short period of time, we have dramatically strengthened our balance sheet and improved our financial flexibility. Since the beginning of 2011, we have generated approximately $1.9 billion in adjusted EBITDA. We have reduced total debt by $570 million and we have built cash by more than $390 million while still returning cash to shareholders.

We began 2012 by sharing our plan to improve our balance sheet, to invest in our business and to return cash to shareholders. I would like to briefly discuss some of our 2012 achievements relating to our plan. We repaid our term loan and reduced our overall debt by approximately $300 million during the year. This debt reduction will reduce pre-tax interest cost by approximately $30 million annually. We funded more than $60 million in discretionary capital, including our logistics project in the Delaware Basin. The loading racks and tanks are operational at this new facility and the pipeline component of the system is progressing well and should begin full operation in the second quarter.

In the next couple of years, our logistics projects will allow us to supply most of El Paso’s sweet crude needs with higher-yielding, cost advantage, Avalon and Bone Spring shale crude oil. At Gallup, we completed reliability projects and a modest expansion that increased our crude capacity from 23,000 barrels a day to 25,000 barrels per day.

As the Brent/WTI spread widened, we took the opportunity to add to our crack spread hedge positions, ending the year with approximately 22% of our planned production hedged for 2013, 20% for 2014 and 10% for 2015.

Finally, we returned approximately $323 million to shareholders through share repurchases and quarterly and special dividends; this made Western the highest dividend yielding equity among our peers in 2012.

We achieved EBITDA of $1.1 billion in 2012. I’m very proud of our team here at Western, and I want to thank them for helping us to deliver a record year.

As we look at the first quarter of 2013, Brent/WTI spreads have remained very strong, averaging more than $19 per barrel, quarter-to-date, resulting in a Gulf Coast 3:2:1 of approximately $26.50 per barrel.

In addition, wider WTI Midland and Cushing differentials will add more than $7 per barrel to our crude cost advantage at the El Paso refinery in the first quarter. Midland/Cushing differentials are returning to more historical levels currently, however, we expect crude oil spreads to continue to be volatile.

We have set very ambitious goals for Western for 2013. We will continue to focus on safety and reliability. We will also plan to further enhance our cost advantaged crude position, grow our logistics assets and increase our financial flexibility and continue to return cash to shareholders.

Our board has approved a 2013 capital expenditure budget of $206 million, with $122 million targeted for discretionary capital. We continue to expand our logistics asset base, which will allow us to further capitalize on new crude oil production in the Permian Basin and in the Four Corners.

Projects will include not only pipeline and gathering assets, but also enhanced rail facilities in and around our refineries. These types of projects are critical to our plan to enhance and extend the crude advantage at our refineries by capitalizing on the locations of our assets.

We continue development of a project at El Paso to improve reliability and expand the capacity by up to 25,000 barrels per day. This project is in its early stages, and we will be in a position to share more on the timing and cost later in 2013.

In January, our board approved a first quarter 2013 dividend of $0.12 per share which was paid to shareholders in mid-February. In addition, we have purchased $82 million in stock as part of our repurchase plan. These actions are consistent with our goal to return cash to shareholders and our objective going forward is to pay dividends with a yield competitive with our peers.

Wrapping up, over the last two years, Western has demonstrated the ability to capitalize on positive market conditions and we have transformed the earnings power of the company. The actions we have taken will enable Western to have another outstanding year in 2013.

Now, I will turn the call over to Gary, who will go through our fourth quarter financials in more detail.

Gary Dalke

Thank you, Jeff. On a GAAP basis the company reported net income in the quarter of $207.6 million or $1.92 per diluted share and a full year 2012 net income of $398.9 million or $3.71 per diluted share. This compares to a Q4 2011 net loss of $64.6 million or $0.72 per diluted share and a full year 2011 net income of $132.7 million or $1.34 per diluted share.

Excluding special items, the company had net income of $155.7 million or $1.45 per diluted share in Q4 2012, which compares to $50.8 million or $0.50 per diluted share in Q4 2011. For the full year, we had net income, excluding special items, of $552.3 million or $5.08 per diluted share, which compares to $330.4 million or $3.14 per diluted share in 2011. A reconciliation of our net earnings to earnings, excluding special items, is included in our press release.

Gross margin at El Paso was $30.77 per barrel for the quarter, which compares to $20.71 per barrel in Q4 2011. Gallup’s gross margin for the quarter was $30.26 per barrel, which compares to $19.47 per barrel in Q4 2011.

Direct operating expenses at our Southwest refineries were $5.93 per barrel for the quarter, which compares to $5.78 per barrel in Q4 2011. El Paso’s costs were $4.36 per barrel for the quarter compared to $4.84 per barrel for Q4 2011. Gallup’s operating costs were $11.43 per barrel for the quarter, which compares with $8.27 per barrel for Q4 2011. Costs at Gallup were up primarily due to increased maintenance and outside contractor expenses driven by weather-related repairs, waste disposal costs and post-turnaround startup support.

Today, company SG&A was $34.5 million for the quarter, compared to $29.8 million in Q4 2011. SG&A expenses were higher, primarily due to incentive compensation, which is tied to profitability, as well as other employee-related costs.

Adjusted EBITDA for the quarter was $298.5 million and $1.1 billion for the full year. This compares to adjusted EBITDA of $144.7 million for Q4 2011 and $786.2 million for the full year 2011.

Depreciation and amortization expense for the quarter was $24.8 million and $93.9 million for the full year. Interest expense was $17.4 million, which is approximately half of the Q4 2011 total, primarily a result of our significant debt reduction during 2012.

During the quarter, cash and cash equivalents decreased by $55.9 million. Our bridge from Q3 to Q4 ending cash position can be found on Page 5 of our slides.

Strong operational cash flow during the quarter was offset by dividend payments, share repurchases and a build in inventory in anticipation of the Q1 turnaround at the El Paso refinery.

Total capital expenditures for the quarter were $71.4 million and for the full year were $202.2 million.

As of December 31, total debt stood at $499.9 million, a $304.1 million reduction versus year-end 2011. We ended the year with $45.9 million in net debt. A summary of our capital structure is available on Page 6 of our slides.

Total liquidity was $848 million at the end of the year, and has averaged approximately $920 million thus far in 2013.

Wrapping up, you can find our first quarter operating guidance on Page 9 of our slides. I would like to point out that our throughput and cost guidance includes the volume impact of the El Paso turnaround.

I’ll now turn the call back over to Jeff Stevens.

Jeff Stevens

Thanks, Gary. It was an outstanding year or outstanding quarter and year for Western. I want to thank our employees for their hard work and I look forward to working with our team to execute our plan for 2013.

Paula, will you please open up the call for questions now?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Evan Calio of Morgan Stanley.

Manav Gupta – Morgan Stanley

Hi, guys. This is Manav Gupta for Evan Calio today. A very quick question on the strategic options of Tex-New Mex pipeline. I mean, would you like to be a part of the southern fields pipeline or you have other options on it? And then I have a quick follow-up?

Jeff Stevens

Thanks. Obviously, the Tex-New Mex line it’s been underutilized the last couple of years, but we feel very strongly that this is an asset that’s going to play a role in Western’s future within our logistics. So I think the answer is that we continue to look for all the options to utilize that pipeline and we’re fairly confident that we’ve got a lot of good options in the future, so I think we’re looking at all the options.

Manav Gupta – Morgan Stanley

And just a quick follow-up, you mentioned kind of a rail opportunity around your refineries. Can you elaborate a little bit more on what kind of opportunities are you looking in terms of rail in your refineries?

Jeff Stevens

Sure. If you look at the location of our two assets and the infrastructure of pipe and rail that we have today, we believe that the West Coast will continue to look for opportunities to bring in inland crude and other blend stocks. And with the position of those two refineries and our ability today to load rail and some potential upgrades at those facilities, we think that strategically, we could be a part of those logistics in helping supply some of the inland crudes to the West Coast. So we want to be in a position to take advantage of those.

Manav Gupta – Morgan Stanley

So, I mean, as I understand, if you go ahead with these rail projects, they could eventually become part of your potential midstream infrastructure or MLPs; is that the right way to think about it?

Jeff Stevens

Well, the way to think about it is that we sit in a very unique situation where a lot of the new crude oil production’s coming online. And whether it’s crude that we’re going to run at the refineries or crude that we potentially could sell to other parties, strategically, we want to be there to take advantage of that. So it’s just a continuation of enhancing our logistic portfolio is the way to think about it.

Manav Gupta – Morgan Stanley

Thank you, guys, and congrats on the great quarter. Thanks again.

Jeff Stevens

Thank you.

Operator

(Operator Instructions) Your next question comes from Chi Chow of Macquarie Capital.

Chi Chow – Macquarie Capital

Thanks. Good morning. Congrats on 2012, really, really well done last year. Maybe this is a question for Mark. I just wondered if we can get an operational update on the 2013 turnaround activity. Is it just limited to El Paso in the first quarter or is there something else? And also, the expense associated with each of those events?

Mark Smith

Okay. Chi, in our guidance, I think we talk about the turnaround expense, so you can look there. The turnaround activity in El Paso is the North side refinery and it’s underway and progressing. And that is the only turnaround activity we have scheduled for the year.

Chi Chow – Macquarie Capital

Okay. I believe there was some unplanned maintenance at El Paso in December; can you give us any updates on that situation?

Mark Smith

Yeah, we had about a one-week shutdown on the cat late December, and our guys did a great job, brought it back up online and no issues.

Chi Chow – Macquarie Capital

Okay. And then on your logistics infrastructure, the Delaware Basin pipelines, is the company going to be using 100% of the capacity, or will there be third-party volumes moving on those lines as well?

Jeff Stevens

Chi, right now, I think the intention is – the goal is to utilize that system to feed El Paso. So, for keeping a certain level of the crude quality in there, I think our intention is to be the primary shipper on those gathering system. And I think that we have – just based on the production numbers we’re seeing, I think over time we won’t have any trouble filling that system up with our own needs for El Paso.

Chi Chow – Macquarie Capital

Can you talk about any sort of expected or implied tariff? I guess, you’d just be paying yourself, but how should we think about an implied tariff rate on those lines?

Jeff Stevens

Well, as soon as we get the lines operational, we’ll file or we’ll set a tariff up for them, but it’ll be relative to other market tariffs for similar gathering systems.

Chi Chow – Macquarie Capital

Okay, great. And maybe just one more question on the Yorktown terminal and wholesale operations. Can you just give us an update on how that business is running, and if there’s any sort of EBITDA contribution number you can provide for us?

Jeff Stevens

That business continues to grow, Chi, and we announced last year the partnership or the relationship with Glencore as a strategic supplier in that market. And we believe that those volumes are going to continue to grow and with the limited space on the pipelines to go to the East Coast, we’re very excited about the potential upside on that. But we haven’t given any guidance yet relative to 2013 because I think we’re still building that business and understanding all the ramifications of refineries that are still in play there. We just had another one shut down and as that refinery goes down, the value of being able to ship on the Colonial line continues to go up.

Chi Chow – Macquarie Capital

Any sort of 2012 EBITDA-type contribution you can share?

Jeff Stevens

Not really. It was kind of a non-event. We still had cost relative to closing the facility and transitions costs. So let us get a couple of quarters under our belt and we’ll be able to give you more guidance relative to that.

Chi Chow – Macquarie Capital

Okay, great. Thanks, Jeff, appreciate it.

Jeff Stevens

Thanks, Chi.

Operator

Your next question comes from Clay Rynd of Tudor Pickering Holt.

Clay Rynd – Tudor Pickering Holt

Good morning, guys.

Jeff Stevens

Good morning, Clay.

Clay Rynd – Tudor Pickering Holt

Quick question on the dividend. So late 2012, issued a few special dividends. Is the right way to think about that is those were kind of one-time things and from here, you’re just going to try to grow the regular dividend? Or, will there – could you see a situation where you do special dividends going forward?

Jeff Stevens

Sure. And, I think the policy that going forward and obviously, this is something our board reviews on a quarterly basis, but I think the way to think about it is that we’re going to continue to take a balanced approach. And when you think about share or cash return to shareholders, we want to be able to continue to opportunistically buy back shares. We want our regular dividend to stay competitive with our peers. And, in certain instances, if it’s appropriate, we would look at a special dividend. But I think looking at all three of those ways of returning cash to shareholders; we’ll continue to do that.

Clay Rynd – Tudor Pickering Holt

All right, great. Thanks.

Operator

(Operator Instructions) Your next question comes from Ann Kohler of Imperial Capital.

Ann Kohler – Imperial Capital

Good morning, gentlemen. Just a couple of questions. Following on Clay’s question regarding basically use of cash and dividends, et cetera, you still are on track, I assume, to complete the share repurchase program that you have outstanding to offset the conversion of the convertible note?

Jeff Stevens

Ann, we have about $100 million or a little over $100 million left in what the board has approved. And so we’ll continue to be opportunistic in buying back shares. And, yes, it is our goal with this share repurchase to help satisfy, potentially satisfy that convert that’s in June of 2014.

Ann Kohler – Imperial Capital

And have you – can you tell us have you purchased any shares during the first quarter?

Jeff Stevens

We have not.

Ann Kohler – Imperial Capital

Okay. And what was the share count common stock basic at the end of the year?

Jeff Stevens

I’ll let Gary answer that.

Ann Kohler – Imperial Capital

And then, just while he’s looking for that answer, I would – from your comments that you just made in regards to Clay’s questions, it sounds as though that once the share purchase program that you currently have is completed in June, that you would consider certainly another program?

Jeff Stevens

I think that the way to think about it is, is a balanced approach and part of that approach would be a share repurchase program.

Gary Dalke

Ann, the share count at the end of the year, basic shares outstanding were 87.6 million shares.

Ann Kohler – Imperial Capital

Perfect. And then just one last follow-up in regards to all that. Is there any particular minimum amount of cash that you want to hold on your balance sheet?

Jeff Stevens

I think that we believe that we’ve targeted about $300 million and it’s in conjunction with what we’re doing with our hedges and overall strategy and we think just based on our balance sheet. I mean obviously, our open trade credit continues to become more wider because of, obviously, the improvement in our balance sheet. But we believe we want to keep about $300 million on our balance sheet.

Ann Kohler – Imperial Capital

Great. Perfect. Thank you so much.

Jeff Stevens

Thanks, Ann.

Operator

Your final question comes from Cory Garcia of Raymond James.

Cory Garcia – Raymond James

Good morning, fellas.

Jeff Stevens

Good morning, Cory.

Cory Garcia – Raymond James

I was just hoping actually for a bit of color regarding the gasoline and diesel crash, where you guys are. Clearly, we saw some weakness this winter in some of the benchmarks and I know you guys supply a bit more of a niche market down there. So I wanted some updated thoughts on how it sort of progressed through the winter and, obviously, into the most recent months and overall what the demand landscape looks like down in that market, particularly on the diesel side?

Jeff Stevens

Sure. The way to think about it, obviously, there’s parts of the country that are impacted more than other parts relative to winter and particularly on the gasoline side of things. But I’d say in general what we saw is typical market demand and margin, relative to the Gulf Coast in most of our markets.

I think the way to think about it is that the Southwest, particularly the Arizona market that’s impacted by the West Coast, remained much stronger than the rest of the country’s margin environment. So we continue to benefit from that and I think we’re seeing that clearly in the first quarter. When you look at the different areas and you look at the margins, the Arizona market and the Western Texas market remained well above the rest of the country. So we’re fairly optimistic about the direction we’re going.

As far as diesel demand, I would characterize diesel demand still good. Some areas are stronger than others. In particular, the mining remains very strong in the Southwest. Some of the other businesses, the rail, I would say is kind of flat and the trucking is relatively flat. But, obviously, in this first quarter, with all the unplanned and planned downtime in our region and the West Coast, products have remained pretty tight through this first quarter.

Cory Garcia – Raymond James

Right. Okay. So the typical sort of, 50-50 blend on the gasoline side and then I guess the diesel is starting to pick up, but maybe not as aggressive as it might get as we move through this year? Is that the right way to, sort of, think about it?

Jeff Stevens

Yeah. I think that the diesel certainly has made it back from where we saw in 2010, 2011. But we’re certainly not back at the levels we saw in 2007.

Cory Garcia – Raymond James

Okay, great. Appreciate the color, guys. Great quarter.

Jeff Stevens

Thanks.

Operator

Thank you. I would now like to turn the call back over to Mr. Jeff Stevens.

Jeff Stevens

Paula, thank you and thank, everybody, for participating in today’s call and your continued interest in Western Refining. And we look forward to our next call.

Operator

Thank you. That concludes today’s Fourth Quarter and Full Year 2012 Western Refining Earnings Conference Call. You may now disconnect your lines at this time and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Western Refining Inc's CEO Discusses Q4 2012 Earnings Results - Earnings Call Transcript
This Transcript
All Transcripts